What Are Assets Under Management Worth to Managers?
Susan Christoffersen, McGill University and CIRANO
Richard Evans, Boston College
René Garcia, Université de Montréal and CIRANO
David Musto, The Wharton School

Two papers were produced as part of this project.

In the first, “What Determines the Value of Assets Under Management?” we address the heterogeneity of mutual-fund investors, in particular, its significance to the timing and circumstances of redemptions. We find that the inflows to top performers make these funds’ future outflows more sensitive to their future performance, and we find that load funds attract investors more likely to remain, and less likely to respond to future performance. A regime-shifting model that attributes inflows to either sensitive or insensitive investors helps determine the performance sensitivity of future outflows. From this model, we are able to estimate the value of a new dollar brought into a fund and relate this to the characteristics of the fund at the time.

The Second paper is titled “The Economics of Mutual-Fund Brokerage: Evidence from the Cross Section of Investment Channels.” Retail investors often lack investment expertise. Mutual-fund brokers can help, but their incentives are mixed so it is an empirical question what value they add, both for consumers and for fund families. Investors pay more to invest through unaffiliated brokers than captive brokers, and while unaffiliated brokers add more value to redemptions, captive brokers add more value to inflows. No-load investors are less likely to sell their poor-performing funds and more likely to sell their winning funds, consistent with a disposition effect. Fund families benefit from a captive sales force through recapture of redemptions, but also suffer through cannibalization of inflows.

The two papers produced in this project will help investment managers better predict fund flows, which is essential to valuing fees from assets under management. The results help fund mutual distributors better choose the mix of funds to sponsor and the means by which the funds should be distributed.